Martin Conway v. Smith Development, Inc.Martin Conway v. Smith Development, Inc.
Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Liam O‘Grady, Senior District Judge. (1:21-cv-01055-LO-JFA)
Argued: December 8, 2022 Decided: April 4, 2023
Before GREGORY, Chief Judge, and KING and RUSHING, Circuit Judges.
Dismissed by published opinion. Judge Rushing wrotе the opinion, in which Chief Judge Gregory and Judge King joined.
ARGUED: Danny Mark Howell, LAW OFFICES OF DANNY M. HOWELL, PLLC, McLean, Virginia, for Appellants. John Simon Lopatto, III, Washington, D.C., for Appellee. ON BRIEF: Jennifer L. Rowlett, LAW OFFICES OF DANNY M. HOWELL,
PLLC, McLean, Virginia, for Appellants.
RUSHING,
Attorney Martin Conway and his law firm, Pesner Kawamato Conway, P.C., (colleсtively, Conway) appeal the district court‘s order rejecting the bankruptcy court‘s report and recommendation to enjoin Smith Development, Inc.‘s legal malpractice suit against Conway and to impose sanctions for violating the Barton doctrine and the automatic stay. Because the district court‘s decision rests on the abstention principles in
I.
In Barton v. Barbour, 104 U.S. 126 (1881), the Supreme Court held that “before another court may obtain subject-matter jurisdiction over a suit filed against a receiver for acts committed in his official capacity, the plaintiff must obtain leave of the court that appointed the receiver.” McDaniel v. Blust, 668 F.3d 153, 156 (4th Cir. 2012). The appointing court should “ordinarily” allow the lawsuit to proceed “unless it is clear that the claim is without foundation.” Id. at 156-157 n.1 (quoting Anderson v. United States, 520 F.2d 1027, 1029 (5th Cir. 1975)). We have extended the doctrine to suits against bankruptcy trustees and their attorneys. Id. at 157.
The present dispute arises against this legal backdrop. Smith Development built luxury residential housing before it fell on hard times during the 2008 housing crisis and then filed for bankruptcy in early 2009. Conway assisted the company in filing its Chapter 11 bankruptcy petition and represented it in the subsequent Chapter 11 proceedings. As the bankruptcy progressed, Smith Development initiated three adversary proceedings
against home buyers who had defaulted on contracts. While those actions were pending, the bankruptcy court converted the bankruptcy to a Chapter 7 case. Post-conversion, the Chapter 7 trustee retained Conway as
Nearly five years later, in April 2017, Smith Development sued Conway in the Alexandria Cirсuit Court in Virginia, alleging legal malpractice arising from Conway‘s representation of Smith Development during the Chapter 11 proceedings and representation of the trustee in the Chapter 7 proceedings. Smith Development lаter nonsuited the action. In April 2019, the company filed a new malpractice action in Alexandria Circuit Court, reprising many of the same theories as its earlier suit. It then moved in bankruptcy court for permission under Barton to proceеd with the lawsuit. The bankruptcy court denied the request and Smith Development‘s motion to reconsider. Undeterred, Smith Development forged ahead and amended its state-court complaint, dropping the Chapter 11 allegations аnd alleging malpractice arising only from Conway purportedly representing Smith Development and the trustee simultaneously in the Chapter 7 proceedings. According to Smith Development, the conflict of interest arising from the allеged concurrent representation influenced Conway to settle the three adversary actions for far less than their actual value.
In January 2021, Conway moved to reopen Smith Development‘s bankruptcy case. Conway asked the bankruptcy court to enjoin Smith Development‘s pending malpractice
suit under Barton and to award Conway damages for the expenses it incurred defending against the malpractice suits. The bankruptcy court agreed with Conway, concluding that Smith Development‘s malpractice suit violated Barton, willfully violated the automatic stay, and warranted sanctions. But because Smith Development challenged the bankruptcy court‘s jurisdiction to decide Conway‘s motion, the bankruptcy court did not issue a ruling. Instead, it issued a report and recommendation with findings and conclusions to the district court. Smith Development did not object to the bankruptcy court‘s findings of fact but challenged its jurisdiction and disputed its legal conclusions.
The district court rejected the bankruptcy court‘s report and recommendation. It instead relied on
Conway timely appealed. Smith Develoрment moved to dismiss the appeal, arguing that Conway was not a party in interest who could move to reopen Smith Development‘s bankruptcy case. We deferred ruling on the motion pending consideration
II.
We have an independent obligation to ensure that we possess appellate jurisdiction. See Steel Co. v. Citizens for a Better Env‘t, 523 U.S. 83, 95 (1998). Congress gave district сourts “original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.”
The district court relied on Section 1334(c)(1) as the basis for its decision to reject the bankruptcy court‘s report and recommendation, to abstain from taking further action in the matter, and to order the bankruptcy court to do the same. Indeed, the court concluded
that “comity and respect for the state courts[] clearly weigh[ed] in favor of abstention” and that federal courts had “already interfered with ongoing state proceedings without considering the[se] important principles.” Conway, 637 B.R. at 819. In the district court‘s view, the state court provided an appropriate forum to adjudicate Smith Development‘s legal malpractice claims and presumably develop the factual record the court found necessary to conclusively rule on Conway‘s arguments. Whatever the merits of the district court‘s reasoning, its abstention decision falls squarely within Section 1334(c)(1) and is thus “not reviewable by appeal.”
Conway acknowledges the obstacle Section 1334(d) poses but offers several reasons why that provision does not apply. Before we address those arguments, we pause tо observe that underlying Conway‘s arguments is an implicit request to recognize an exception to Section 1334(d) that would allow us to review a district court‘s permissive abstention decision when it exceeds the scope of the court‘s authority. Such an exception arguably exists; the Supreme Court has recognized a similar limitation on an analogous bar to appellate review in
authority.” Ill. Mun. Ret. Fund v. Citigroup, Inc., 391 F.3d 844, 849 (7th Cir. 2004) (describing
We need not resolve this lurking question, however, because even if we were to recognize the exception to Section 1334(d) that Conway‘s arguments presuppose, it would not apply here, as the district court‘s order was well within its statutory authority. Smith Development‘s bankruptcy case proceeded under Chapters 7 and 11, so Section 1334(c)(1)‘s carve-out for Chapter 15 cases is not implicated. See Firefighters’ Ret. Sys., 796 F.3d at 525. And the district court premised its abstention decision on grounds expressly authorized in Section 1334(c)(1) when it determined that “comity and respect for the state courts” warranted abstention. Conway, 637 B.R. at 819; see
In response, Conway primarily argues that a district court is without authority to abstain in favor of a state court that lacks subject-matter jurisdiction due to a Barton violation. This argument falters because it assumes a Barton violation occurred. Yet the district court abstained in part because it dеtermined the record did not yet show that Barton “would categorically deny the [state] court jurisdiction.” Conway, 637 B.R. at 816; see McDaniel, 668 F.3d at 156-157 n.1 (noting the suit should proceed “unless it is clear that
the claim is without foundation” (quoting Anderson, 520 F.2d at 1029)). Conway‘s argument asks us to review the merits of the district court‘s Barton analysis, but on this record, doing so would be akin to reviewing the merits of the district court‘s abstention decision, which Section 1334(d) forbids.
Conway also suggests thе district court had no authority to enter an abstention order because, under Barton, the district court itself lacked jurisdiction over Smith Development‘s malpractice claims. This argument fares no better than the first. Barton concerns subject-matter jurisdiction over a separate action, not jurisdiction over the proceedings in which a party seeks Barton protection in the first place. And even if we accepted the argument‘s doubtful premise, it fails on its own logic beсause the bankruptcy court issued a report and recommendation to the district court, thereby authorizing the district court to rule on the matter.
Finally, Conway contends that if we dismiss this appeal for lack of jurisdiction, the parties will effectively be out of court. See Quackenbush, 517 U.S. at 712-714; Moses H. Cone Mem‘l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 10 n.11 (1983). While this argument may have merit as applied to other types of abstention, here “Congress has expressly limited appellate jurisdiction.” Tri-Valley Distrib., 533 F.3d at 1216 (reasoning Section 1334(d) supersedes ordinary application of the collateral-order doctrine). And as discussed, even if we recognized a narrow exception to Section 1334(d)‘s clear jurisdictional bar, the district court‘s order would not fall within it.
III.
Section 1334(d) precludes our reviеw of Conway‘s appeal; therefore, we dismiss the appeal for lack of subject-matter jurisdiction. Because we hold that Section 1334(d) controls, we need not address the separate
DISMISSED